As a part of its yearly review exercise, rating agency A.M. Best has affirmed the financial strength ratings (FSR) and the issuer credit ratings (ICR) of Torchmark Corp.
(TMK - Analyst Report
) and its subsidiaries. Torchmark's subsidiaries have been affirmed with FSR of "A+" and ICR of "aa-," while Torchmark has been affirmed with an ICR of "a-." All the existing debt ratings have also been affirmed. All these ratings hold a stable outlook.
A.M. Best acknowledges Torchmark's solid market presence as well as a broad product profile that offers annuities, whole and term life insurance, accidental death insurance, health insurance, Medicare supplements and long-term healthcare policies. The rating agency views favorably positive contribution made by Torchmark’s subsidiaries, Liberty National Life, American Income Life Insurance and Globe Life and Accident Insurance.
The rating agency has a positive view of the product diversification benefit from the company’s individual annuity and supplemental health insurance lines of business.
The recent acquisition of privately-held supplemental health insurer Family Heritage Life Insurance Company of America is also viewed positively by the rating agency. The acquisition will be accretive to the company’s 2013 earnings.
Cost reduction measures adopted by the company, improved persistency and agent recruitment at some of its major subsidiaries contributed to the rating affirmation.
The rating agency views favorably Torchmark’s business mix which primarily consists of individual life insurance products. These provide more stable earnings than the supplemental health insurance business.
However, the rating agency views premium challenges in some lines of businesses. The company’s health insurance business continues to be affected by the changes related to the Patient Protection and Affordable Care Act. In response to the changes required to be made as per the Act, the company has discontinued selling some of the products in this segments, which has directly hit contribution from this segment.
Torchmark also continues to faces issues relating to agents in Liberty National. While the company has undertaken effort to appoint and retain agents, these efforts have yielded only modest results. The rating agency remains concerned with declining contribution from Liberty National stemming from lower agent count.
In addition Torchmark’s long-duration investment portfolio, with a high concentration of fixed maturity assets, which may cause market value to decline in the event of a rise in interest rates from the current low levels, also proved to be an offsetting factor to the ratings. The rating agency also notes that the company has a high level of fixed assets, which are rated "bbb". Both these features of the company's investment portfolio would make it vulnerable to investment impairments, if there is a downturn in the credit cycle.
A.M. Best also acknowledges Torchmark’s moderate leverage ratio which stood at roughly 24% level. Its debt servicing capability is also strong which is witnessed by interest coverage ratio of 9x.
A.M. Best stated that ratings will be subject to downgrade if risk-adjusted capitalization deteriorates to a level that does not support the ratings or if operating performance falls markedly short of A.M. Best’s expectations or credit risk increases within the investment portfolio. .